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Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach

Author

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  • Wenting Song
  • Samuel Stern

Abstract

This paper provides direct evidence of the importance of firm attention to macro-economic dynamics. We construct a text-based measure of firm attention to macro-economic news and document firm attention that is polarized and countercyclical. Differences in attention lead to asymmetric responses to monetary policy: expansionary monetary shocks raise market values of attentive firms more than those of inattentive firms, and contractionary shocks lower values of attentive firms by less. We use the measure to calibrate a quantitative model of rationally inattentive firms with hetero-geneous costs of information. Less attentive firms adjust prices slowly in response to monetary innovations, which yields non-neutrality. As average attention varies over the business cycle, so does the efficacy of monetary policy.

Suggested Citation

  • Wenting Song & Samuel Stern, 2022. "Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach," Staff Working Papers 22-3, Bank of Canada.
    • Handle: RePEc:bca:bocawp:22-3
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    References listed on IDEAS

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    1. Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach
      by Christian Zimmermann in NEP-DGE blog on 2022-03-07 14:01:13

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    More about this item

    Keywords

    Business fluctuations and cycles; Inflation and prices; Monetary policy;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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